Qwest Looking to Buy Data Centers
April 13th, 2007 By: Rich Miller
Qwest is “on the hunt for more data centers,” according to an article in the Denver Post (link via John Rath), which says the regional telco is also looking for hosting companies to acquire. Denver-based Qwest has 14 data centers in 11 cities, and is seeing growth in its managed hosting business, traditionally the most profitable sector of the hosting industry.
The article looks at Qwest’s strategy, but also explores investor interest in acquiring data centers, and the questiohn of whether the best value proposition is to acquire facilities or hosting companies:
Data centers are attractive to private equity firms and companies such as Qwest because they offer predictable, sustainable cash flow, said Paul Stapleton, partner at DH Capital, an investment bank with dual headquarters in Boulder and New York. “Private merger and acquisition activity is very strong,” and public companies are becoming interested in hosting too, he said. “Everyone understands the value proposition now.”
The story notes that while it’s a sellers’ market for data centers, hosting assets can be acquired more cheaply, with some investment bankers in the sector estimating that shared hosting operations are currently selling for 1 times annual earnings. Many shared hosts operate out of colo space rather than their own data centers, while dedicated hosting firms are more likely to have their own facility.
It indeed has been a buyer’s market during the past six years. We’re a mid-sized managed hosting/colo operation and we’ve acquired eight shared/dedicated hosting companies since 2000. All of them have been successfully consolidated into our facility in Seattle. Virtually all of them were ~1x revenue purchases. Only three of them operated their own facility.
The whole purpose of acquisitions during the 2001-2006 time frame was to acquire customers at a relatively reasonable price. During the especially bad times of 2002-2004 this was about the only way to achieve growth, since all of us were seeing our customers either shrink, or vanish at an alarming rate. I suspect consolidations will continue as they are an attractive method for growing top line revenue while maintaining the bottom line. A no brainer really if you have the capital.
The colocation market is a harder buy though. The only things that would make a colo company REALLY attractive to a buyer these days is either very lucrative existing clients with long-term contracts, or significant excess capacity in an awesome facility. We have plenty of both, but the offers we’ve seen lately are not particularly attractive… especially with the strong demand for colo space we’ve seen in the past year.
No seller’s market in colocation… yet.